Everyone who lives in Spain knows that there is a full-on construction boom taking place. You only have to look out the window to find evidence of it. Non-residents with an interest in Spanish property have to work harder to know what’s going on, but even they are now at least vaguely aware that Spain’s construction sector is ‘excited’.
Of course, a booming construction sector is no bad thing when it is a healthy response to economic fundamentals, if it does not gobble up a disproportionate amount of the economy’s resources (at the expense of other types of economic activity), and if it lays the foundations for sustainable long-term economic growth.

Does the Spanish construction boom look healthy? Not if you compare British and Spanish housing starts (see chart below). Though it is just one benchmark, to my mind it shows that construction levels in Spain are excessive and unsustainable, especially now that demand for Spanish property is cooling. Too many properties are being built in Spain, of the wrong type, and at the wrong price. Many of them will struggle to find buyers when finished.

So what measures are needed? Developers need to focus more on what people want to buy, rather than what it suits developers to build, and housing starts need to tumble fast to bring some equilibrium back to the market. Unfortunately, Spain is now so dependent upon construction for jobs and economic growth that a contraction in the sector could cause all sorts of economic problems. What would the hundreds of thousands of new construction workers do instead? Become hairdressers?

Despite the economic risks, the composition and rate of new construction in Spain needs to adapt fast to cooling and changing demand. Otherwise the imbalances will just get worse, and the inevitable readjustment will be more painful. As Jimmy Cliff sang, “The harder they come, the harder the fall.”

MARK STUCKLIN

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SPANISH PROPERTY MARKET NEWS

Property market problems in Marbella
The Spanish daily ‘El Pais’ reports that political uncertainty and corruption scandals have pushed Marbella’s property market to its lowest point in 5 years. The paper quotes Emilio Langle – residential property director of real estate consultants Aguirre Newman – as saying that “This Andalusian city’s property market is in recession: new developments are completed with 35% of units unsold, and investment potential is practially zero.” He goes on to reveal that the average time to sell for new developments has risen to 32 months, up by 3 months compared to a year ago.

Foreign press pessimistic over Spain’s economic prospects and property market
Foreign Dailies such as The FT, The Guardian, and Le Figaro (France) have all recently published articles raising doubts about the sustainability of Spain’s economic growth, and the economic dangers of Spain’s property bubble bursting.

In general the articles argue that, impressive as Spain’s economic growth has been over the last decade or so (Spain now generates 12% of the Euro-zone’s GDP, and was responsible for 32% of the Euro-zone’s GDP growth between 2000 and 2005 – says The Guardian), it has been driven largely by a real estate boom that has covered up serious structural problems in the economy, for instance labour market rigidities, rapidly rising labour costs and low productivity gains.

Le Figaro quotes Ricardo Verges of Spain’s association of architects (see below) as saying that “the Spanish real estate market is growing at a frenetic rate, its absolute madness,” and that “This growth is not sustainable. Spanish household mortgage debt has now risen to 600 billion Euros, which means we have hardly paid for anything we have build, just the interest.” Le Figaro also notes a recent study of 19 EU countries by the organisation Euroconstruct finding that 28.4% of all new construction in the EU has taken place in Spain.

Rapidly increasing property prices (150% up since 1998 despite the stock of properties doubling in the same period – according to The FT) can partly be blamed on Spain’s membership of the Euro-zone, where low interest rates intended to resuscitate Germany’s economy have not suited Spain’s overheating economy. Low interest rates mean cheap money and easy credit, which in Spain’s case has fanned the flames of a real estate boom. As a member of the Euro-zone Spain has been unable to raise interest rates to cool the boom in a timely fashion, and can no longer devalue its currency – formerly one of Spain’s favourite ways of increasing its competitiveness.

Some of the articles conclude that Spain’s real estate bubble will burst sooner or later, with painful economic consequences. Spain’s real estate sector presently generates 18% of Spain’s GDP and 12% of it’s employment, the equivalent of 2.5 million jobs.

Clampdown on Illegal building and corruption in Malaga rolls on
Operation Malaya – the police and judicial operation against illegal building and corruption centred on Marbella in the Andalusian province of Malaga – has entered a second phase with the arrest on 27 June of 30 more individuals, including local politicians, officials, and property developers. Most of the arrests have been made on suspicion of bribery and money laundering. Property developers arrested to date include Fidel San Roman of the developer Cantizal, Emilio Rodriguez of Construcciones Salamanca, and Francisco Garcia of Aifos.

Meanwhile the Spanish authorities continue to stop illegal building projects in the province of Malaga. The largest intervention to date, authorised in June by magistrates in Coin, has stopped work on some 2,000 new properties on various developments in the municipality of Tolox, located inland from Marbella.

Record number of Spanish housing starts despite softer market
Despite a softer market, cooling prices, and lengthening sales times, Spain is still building more properties than the UK, France and Germany combined.

The latest figures released by Spain’s association of architects (el Consejo Superior de los Colegios de Arquitectos de España) show 211,556 housing starts in Spain in the first quarter of the 2006, up by 1% on the same period last year. However, over a 12-month period to the end of March 2006, housing starts were up by 4.1% compared to the same period last year, reaching 820,107 – the largest number of housing starts ever to take place in Spain during a 12-month period. The previous 12-month record was achieved in 2005, with a total of 812,294 housing starts from January to December.

Commenting on these figures, Ricardo Vergés – the association’s chief economist – described this level of housings starts as “unsustainable”, and pointed out the risks to the Spanish economy.

By region, Andalusia continues to build the greatest number of new homes, with 45,300 housing starts in the first quarter of the year (down 6% on 2005), followed by Catalonia (31,975, up 1.8%), and the Valencian Region (26,554, down 4.1%).

Extremadura experienced the greatest increases in housing starts in the first quarter of the year, up by 33.5% to 4,599 starts, followed by La Rioja, up by 27.9 to 2,238, and Galicia, up by 22.6% to 13,890.

Excluding Ceuta and Mellia, the greatest percentage falls in housing starts by region were in Navarra, down by 36% to 2,081, Asturias, down 30.5% to 3,631, and Cantabria, down 12.9% to 2,968.

Meanwhile, a new report from Euroconstruct reveals that Spain accounted for 28.4% of all new European housing starts in 2005, whilst only having 9.7% of the EU’s population. The report forecasts that the growth in residential construction activity in Spain will gradually decline, reaching average European levels some time after 2008. One of the reasons for this is the withdrawal of European structural funds, which will now go to the 10 new EU member states.

Property sales in Barcelona and Madrid fall by 50%
A new report from Spanish real estate consultants Forcadell reveals that property sales in Barcelona and Madrid have fallen by 50% this year compared to 2005. The report finds that an excess of supply over demand in Spain’s largest cities has lead to a slight fall in the prices of resale properties, and that vendors are starting to accept offers 15% to 20% below asking prices.

According to Gonzalo Bernandos of Forcadell 650,000 new properties will be built this year in Spain, whilst plans to build 820,000 properties will be signed off by architects. This means that in 2007 there will be 350,000 properties left unsold, adding further pressure to the Spanish real estate market. Bernandos concludes that “the slow down of property prices is now a reality, and will probably get worse in coming years.”

More Spanish properties, but less accessible than ever
A new report from an organisation that monitors sustainability in Spain (Observatorio para la Sostenibilidad de España – OSE), reveals that 30,000 square metres are built every day in Spain, and voices concern about the record 812,294 housing starts in Spain last year – more than France, Germany and the UK combined. According to Luis Jiménez – the director of OSE –half of the new properties being built do not match real demand for housing, and are built with speculative criteria in mind. Jiménez also raises a concern that, whilst there are more and more new properties on sale in Spain, high prices mean they are increasingly inaccessible to first time buyers like young adults.

Price of new homes falls in Madrid
The price of newly-built homes in Madrid has fallen by 7.2% over the last year, according to a study by the real estate consultants Aguirre Newman. The size of the average new home sold in Madrid over the last year was 12% smaller than before, and more sales took place in cheaper, outlying areas, which explains why sales prices fell. On the other hand, the price per square metre of new property rose by 5.5% over the period, 10% less than the year before, and just 1% more than inflation.

Euribor still rising, Spanish mortgages getting dearer
Euribor – the rate used to calculate interest payments for most mortgages in Spain – started June on 3.37% and finished the month on 3.51%. The average for the month, which is the rate used to calculate mortgage repayments, was 3.4% (to be confirmed by the Bank of Spain), up from 3.308% in May. As a consequence, borrowers with variable-rate mortgages in Spain will face higher mortgage payments.

European Central Bank raises base rates to 2.75%
The ECB raised Euro-zone base rates in June from 2.5% to 2.75%. The increase was expected by the markets, and had already been priced into Euribor rates – the interest rate most commonly used to calculate mortgage repayments in Spain. The ECB has made it clear that more increases in base rates this year are on the cards.

Spanish household debt reaches 110% of income
The Bank of Spain has expressed concern about the fact that Spanish households continue to spend more than they earn, causing household debt to rise to 110% of income. This ratio of household debt to income is 10 points higher than a year ago, and 20 points higher than the European average.

Cost of average Spanish property now equal to 6 years of net salary
A new study by Caixa Catalunya – a Spanish savings bank – reveals that the number of years of salary required to buy an average Spanish property rose by 45.5% between 2000 and 2005, from 4.4 years net salary to 6.4 years (for a new property of 100 m2). Over the same period, the cost of an average new property rose by 12.5% each year, almost 3 times more than average incomes, which only increased by 4.5% per year.

Spanish property ladder harder to get onto
The Spanish Mortgage Association has warned that, due to higher Spanish property prices, rising interest rates, and tougher lending criteria, getting on the property ladder will get harder for first time buyers during 2006.

Bank of Spain expects higher interest rates to bring about orderly ‘correction’ in Spanish property prices
In a recent Q&A with journalists, Jaime Caruan – Governor of the Bank of Spain – has argued that it is not entirely clear that property inflation in Spain is cooling, though he did concede there are signs that prices are beginning to slow “un poco.” Nevertheless, Caruan is convinced that overvalued Spanish property prices will eventually be brought into line by rising interest rates, though the correction will happen in a gradual and orderly fashion.

12% of Spaniards plan to buy a property this year
The Spanish financial daily ‘Expansión’ reports that a new Europe-wide study by the consultancy TNS reveals that 12% of Spaniards plan to buy a property this year, shrugging off concerns about rising interest rates, higher property prices, and increasing debt. Only the Italians are more bullish about buying property, with 14% of households planning to buy this year. Figures for other countries are UK (9%), France (8%), The Netherlands (6%), and Germany (3%).

1 in 4 new properties in Spain are holiday homes
A new report from Grupo I (III Estudio sobre la Vivienda Vacacional en España) estimates that 1 in 4 new properties in Spain are built as holiday homes, and 40% of these are bought by foreigners. This means that 150,000 holiday homes are built a year in Spain, of which 60,000 are bought by foreigners, predominantly the British. The report finds that demand from foreign investors has reduced drastically, largely due to high prices. Nevertheless, the report forecasts that prices for holiday homes in Spain will increase by 9% in 2006, and 6% in 2007. According to this report, the average Spanish holiday apartment of 2-beds and 114m2 is 233,000 Euros.

© Mark Stucklin (Spanish Property Insight)